international relations - unit 3

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Gains from Trade

The benefits states receive from engaging in economic exchange in goods and services, increasing overall wealth.

Absolute Gains

The total economic benefits that each state receives from trade and specialization, regardless of how much the other state gains.

Comparative Advantage

Ricardo’s idea that a state benefits from specializing in producing goods it makes more efficiently relative to others—even if it is not the best producer overall.

Specialization and Trade

The process of focusing on producing what one is relatively efficient at and trading for everything else to increase total output and wealth.

Relative Gains

Concerns about how much one state gains from trade compared to another, and whether those gains affect the balance of power.

Free Trade

Trade without barriers (tariffs, quotas, regulations). An ideal of frictionless exchange allowing maximum benefits.

Tariffs

Taxes placed on imported or exported goods, typically used to generate government revenue or protect domestic industry.

Nontariff Barriers (NTBs)

All non-tariff obstacles to trade, such as quotas, regulations, safety standards, or paperwork that hinder imports.

Dumping

Predatory economic practice in which a producer sells goods abroad at a loss to drive competitors out of the market, planning to raise prices later.

Neo-Mercantilism / Economic Nationalist

Modern version of mercantilist thinking that supports trade surpluses and state intervention to build national power and protect domestic industries.

Liberal International Economic Order (LIEO)

Post–WWII system created at Bretton Woods to promote free trade, currency stability, and development through multilateral institutions.

Closure

When a state restricts or shuts off trade to protect strategic industries or state security, reducing global gains from trade.

Trade Dilemma

A spiral in which states raise trade barriers (like tariffs) to protect domestic producers, prompting retaliation and reducing total trade (similar to the security dilemma).

Equity Debate

Disagreements over how the gains from trade should be distributed among states, often raising fairness concerns from weaker states.

Hegemon

A dominant global power that shapes the international trade system; free trade expands when the hegemon supports it.

Universal Free Trade

Effort to reduce trade barriers among all states simultaneously through multilateral negotiations (e.g., WTO system).

Regional Trade Agreements (RTAs)

Trade agreements among a subset of countries that lower barriers within the group but discriminate against outsiders (e.g., EU, US-Israel FTA).

GATT (General Agreement on Tariffs and Trade)

1947–1994 multilateral framework that reduced tariffs and expanded trade through negotiation “rounds,” eventually replaced by the WTO.

Voluntary Export Restriction Agreements (VERAs)

Deals where exporters agree to limit exports to avoid tougher trade restrictions (e.g., Japan limiting car exports to the US).

WTO (World Trade Organization)

Successor to GATT; a permanent institution promoting free trade, monitoring compliance, settling disputes, and expanding rules to services, agriculture, and intellectual property.

Most Favored Nation (MFN)

WTO principle requiring that trade concessions offered to one member must be extended to all members.

Sovereign Coping

WTO rule allowing states to retaliate (e.g., impose tariffs) if they are victims of unfair trade practices like dumping.

Trade Creation

When a regional trade agreement increases trade by shifting consumption to more efficient producers within the bloc.

Trade Diversion

When a regional trade agreement causes trade to shift from a more efficient external producer to a less efficient member due to lowered internal tariffs.

Common Agricultural Policy (CAP)

EU policy supporting farmers through subsidies, protected prices, and import barriers, often criticized for market distortion and harming Global South agriculture.

European Union (EU)

Regional trade and economic union that evolved from customs cooperation into a fully integrated common market with free movement of goods, services, capital, and people.

Common Agricultural Policy (CAP)

EU policy supporting farmers through subsidies, protected prices, and import barriers, often criticized for market distortion and harming Global South agriculture.

Foreign Currency Market

Millions of virtual and physical locations where people and corporations buy and sell currencies. Tourists, importers, and investors use it to exchange one currency for another.

Currency Exchange

The act of trading one currency for another in order to buy goods, services, or pay expenses in another country.

Supply and Demand (for currency)

Currency values are determined by supply (mainly controlled by governments) and demand (from tourists, importers, and speculators). Changes in supply and demand cause currency values to rise or fall.

Speculators

Investors who buy and sell currencies to profit from swings in their value, similar to stock traders. Their expectations can influence currency movements.

Appreciation

When a currency increases in value relative to other currencies. It is easier for a government to deal with since it can increase supply.

Depreciation

When market forces push down the value of a currency. Imports become more expensive, exports and foreign investment increase, and foreign debt becomes harder to repay.

Foreign Direct Investment (FDI)

Debt owed in another country’s currency. Because debts are owed in someone else’s money, depreciation makes repayment more expensive.

Devaluation

Government-initiated action that lowers the value of a currency compared to others. Used to reduce imports and increase exports without industries becoming more efficient.

Currency Crisis

A situation in which a currency drops rapidly in value with no end in sight. It can begin through market-driven depreciation or government-driven devaluation.

Trade Deficits

When a country imports more than it exports. Trade deficits reduce foreign demand for a currency and therefore spur depreciation.

Government Budget Deficits

When governments spend more than they collect, causing investors to expect increased money supply and putting downward pressure on currency value.

Fire Sale (of assets)

When depreciation makes domestic assets, such as factories or utilities, look cheap to foreign investors, leading to a rapid sell-off of key assets.

Currency Dilemma

Similar to the trade dilemma. States devalue to protect themselves during hard times, but doing so harms trading partners, provoking retaliation and reducing overall wealth.

Competitive Devaluation

When governments respond to each other’s currency devaluations, creating downward spirals in currency values and disrupting trade, as in the Great Depression.

Globalization

Increasing flows of trade and investment across borders that impact the value of currencies.

Eurocurrency Market / Offshore Banking

Originally, Western Europeans holding US dollars. Now called offshore banking: foreigners setting up bank accounts in a solid currency (dollars, Euros, Pounds) free of government regulation.

Political Development

The extent to which a state has effective institutions and legitimacy. Lack of political development leads states to resist depreciation since they purchase legitimacy through cheap imports and domestic spending fueled by foreign loans.

Embedded Liberalism

Ruggie’s term for the post-WWII Western consensus to apply government management of capitalism internationally, balancing trade openness with domestic protections.

Unilateral

A state acts alone to establish the exchange rate for its currency. May make a currency non-convertible, trade goods for goods, or peg to a stable value like gold or another currency.

Pegging

Fixing a currency’s value to something else of recognized value, like another currency or gold.

Dollarization

Unilateral pegging of a weak local currency (such as Latin American states) to the US dollar to stop hyperinflation or depreciation.

Multilateral Peg

System where multiple countries coordinate fixed exchange rates, such as post-WWII Bretton Woods, with the US dollar at the center.

International Monetary Fund (IMF)

An international organization that provides loans of foreign currency to governments facing depreciation, funded by member contributions called quotas.

Quota (IMF)

A member’s contribution to the IMF, which determines voting power and the maximum loan it can take.

Integration

Countries coordinate currency policies for economic integration, like the European Exchange Rate Mechanism and later the Euro.

European Exchange Rate Mechanism (ERM)

A system of multilateral pegging in Europe with currency value bands to facilitate trade and economic stability (“channel” ±6%, “snake” ±2.25%).

European Currency Unit (ECU)

A basket currency unit made from multiple Western European currencies used to peg values in the ERM.

Basket Currency

two or more currencies, peg to that value

Euro

Shared currency adopted by EU states to remove exchange rate uncertainty, transaction fees, and depreciation/devaluation issues among members.

Structural Problem

When a state’s domestic policies, institutions, or economy (rather than market forces) are the cause of persistent depreciation.

Structural Adjustment Program (SAP)

A package of domestic reforms required by the IMF for loans, generally including reducing government role, balancing budgets, and currency devaluation to strengthen the economy.

Managed Float

A currency system where supply and demand largely determine value, but governments intervene to smooth extreme fluctuations, often coordinated multilateral action.

Inflation

prices going up because the currency is dropping in value

Development

economic development or the growth of a particular economy, including political and social dimensions.

Investment

Resources allocated to increase production and efficiency, diversify production, or expand exports; investment must be wise to avoid waste.

Capital

Monetary and physical resources required for any economic enterprise to produce goods and services.

Materials (Inputs)

Resources or raw materials used in production that contribute to economic growth.

Techniques / Technology

Knowledge, methods, and technological tools employed to improve production and efficiency.

FDI (Foreign Direct Investment)

Investment by international businesses into a developing state, providing capital, technology, and managerial expertise to support production

Quality of Life Gaps

Differences in wealth, opportunities, and well-being between populations, regions, or states that highlight unequal development.

Global North / Global South

The distinction between more developed, wealthier states (Global North) and less developed, poorer states (Global South).

Developing World / Lesser Developed States

States with lower levels of economic development, often located in the Global South

Human Development

Defined by the UNDP as a process aimed at maximizing human potential, including health, education, freedom, and a minimum standard of living.

Development Gaps

Economic, social, and human inequalities that exist both within and between countries, creating obstacles to progress.

Debt

Financial obligations, often foreign loans taken by developing states to fund development projects; requires repayment with interest.

Geography (as a cause)

Unequal distribution of natural resources across the world, which can create differences in economic power and development opportunities.

Modernization Theory

A theory suggesting that cultural values and social factors play a causal role in economic development.

Colonialism

Historical domination of territories by foreign powers, shaping economies to benefit the colonizers, often leaving former colonies dependent on exports of raw materials.

Dependency Theory

Explains the lack of development in former colonies as a result of economic dependence on finance capital from developed states, perpetuating inequality.

Self-Help / Self-Reliance

A unilateral development strategy emphasizing reliance on internal resources and reducing dependence on external aid or investment.

Laissez-Faire Approach

Minimal government involvement in economic development, allowing private businesses to drive growth through market incentives.

Economic Nationalism / Socialism (in development)

Government led development strategies focused on building industries and allocating resources according to nationalist or socialist priorities.

Unilateral Trade

A development strategy where states focus on national-level industrial and trade policies without significant reliance on external actors.

Import Substitution Industrialization (ISI)

A strategy in which states build industries to produce domestically what was previously imported, often using high tariffs to protect “infant industries.”

Infant Industry Argument

Justification for protecting new domestic industries from international competition until they become competitive.

Export-Oriented Industrialization (EOI)

Strategy promoting domestic industries that produce goods for export, often using state incentives to encourage private sector participation.

Developmental States

States with strong political capacity to plan, mobilize, and distribute resources in order to guide economic development effectively.

Newly Industrialized States (NIEs)

States that have achieved significant industrial growth and economic development, often through export-oriented strategies.

MNCs (Multinational Corporations)

International businesses that invest, produce, and operate across multiple countries

Race to the Bottom

A scenario where states compete to offer the most attractive conditions for foreign investors, often reducing labor, safety, or environmental protections.

Capital Flight

Rapid withdrawal of financial assets from a country, leading to currency depreciation and potential economic collapse.

Portfolio Investment

Foreign purchase of stocks, bonds, or securities that provides capital but does not involve direct control over production.

Aid / Official Development Assistance (ODA)

State-provided support to promote economic development in other states, including loans, grants, or in-kind assistance.

Microlending

Small loans given to grassroots entrepreneurs, often women, to start businesses and repay once profitable.

Regional Development

Cooperation between states within a geographic region to implement development projects and reduce internal inequalities.

EU Budget / Regional Policy / Cohesion Policy / CAP

European Union programs designed to reduce regional inequalities and support development, particularly in agriculture and less-developed areas.

NIEO (New International Economic Order)

1970s Global South initiative seeking commodity price controls, trade preferences, increased aid, debt forgiveness, technology transfer, and more control over FDI to reduce dependence on the North.

South-South Relations

Economic and developmental cooperation between states in the Global South to strengthen regional development and reduce reliance on the North.

Multilateral

Cooperation among multiple countries through international institutions to provide development assistance, coordinate policy, and manage global problems.

UNDP (United Nations Development Programme)

The UN’s main development agency focused on eradicating poverty, building institutions, and promoting sustainable development in poorer states.

FAO (Food and Agriculture Organization)

UN agency focused on improving food production, agricultural development, and combating hunger.

Green Revolution

A scientific and policy effort to dramatically increase agricultural yields in the developing world through improved seeds, fertilizers, irrigation, and farming technologies.

Sustainable Agriculture

Agricultural strategies that increase production while maintaining long-term soil quality, environmental protection, and social well-being.